Thank You

Error.

Bill Hambrecht knows about IPOs. The co-founder of Hambrecht & Quist, a onetime technology investment-banking powerhouse that underwrote the initial offerings of young companies like
Apple,
aapl -0.8743973196044782%Apple Inc.U.S.: NasdaqUSD121.3
-1.07-0.8743973196044782%
/Date(1438376400350-0500)/
Volume (Delayed 15m)
:
41225145AFTER HOURSUSD121.45
0.150.1236603462489695%
Volume (Delayed 15m)
:
1659808
P/E Ratio
14.006928406466512Market Cap
691740216377.936
Dividend Yield
1.7147568013190437% Rev. per Employee
2409500More quote details and news »aaplinYour ValueYour ChangeShort positionAmazon.com,
amzn -0.1136448319546911%Amazon.com Inc.U.S.: NasdaqUSD536.15
-0.61-0.1136448319546911%
/Date(1438376400192-0500)/
Volume (Delayed 15m)
:
2883547AFTER HOURSUSD536.04
-0.11-0.020516646460878484%
Volume (Delayed 15m)
:
142051
P/E Ratio
N/AMarket Cap
250762723337.341
Dividend Yield
N/ARev. per Employee
621733More quote details and news »amzninYour ValueYour ChangeShort position
and Genentech, he has been involved in just about every aspect of the business for more than 40 years. After completing the sale of his firm in 2000, he ultimately resumed his entrepreneurial path, starting WR Hambrecht, which has used an electronic version of what's called an OpenIPO, a trademarked way to sell shares of new companies through a Dutch auction. Its biggest deal to date was the IPO of
Google.
In light of investors' disappointment in
Facebook's
FB -1.2603718096838568%Facebook Inc. Cl AU.S.: NasdaqUSD94.01
-1.2-1.2603718096838568%
/Date(1438376400018-0500)/
Volume (Delayed 15m)
:
43464485AFTER HOURSUSD93.7
-0.31-0.3297521540261674%
Volume (Delayed 15m)
:
3044560
P/E Ratio
91.27184466019418Market Cap
264002337757.685
Dividend Yield
N/ARev. per Employee
1468310More quote details and news »FBinYour ValueYour ChangeShort position
abysmal debut, we thought it was a good time to chat with an experienced banker who's providing an alternative to the traditional system.

Barron's: Can you give us a brief explanation of how your IPO system works?

Hambrecht: Our method is based on a system designed by William Vickrey, a Nobel Prize-winning economist who uses a mathematical model to treat all qualifying bids evenly and impartially. At the time of the effective date, usually two weeks after the private auction starts, bids get assembled and stacked from highest to lowest offering prices, determining the exact price needed to sell all the shares offered. This "clearing price" becomes the price offered to the public. If more shares are bid for than are available at or above the clearing price, bids are adjusted on a pro-rated basis.

Have you gotten a few calls since the Facebook IPO fell?

Yes. The Facebook offering clearly shows that the traditional offering doesn't work. Many people got hurt. Key issues still have to be addressed. Who raised the share count by 20% days before the offering? Was the information from the company about lowering its profit estimates properly disseminated to the public? Why did they raise the number of shares and increase the average price, in the face of reduced expectations for future earnings? Someone lost touch with what was going on and misjudged the real investment demand for the offering.

"I want to challenge entrepreneurs to revolutionize the new-issue process, urging them to come public early and let the public participate…" -- William Hambrecht
Robert Houser for Barron's

Conditions have changed since the dot-com era. New rules like Sarbanes-Oxley [a law mandating that executives sign off on financial statements] were put in place and the makeup of the IPO industry changed. Mutual funds used to dominate. Now hedge funds are the big buyers, and they are even more prone to flip. The evidence shows that buy-and-hold investors are getting killed. According to our research, most of the marquee Internet IPOs done over the last two years have performed poorly after the first day's trading.

The traditional IPO tends to build in disappointment by bidding up the initial price only to have it fall. An inflated trading price puts pressure on management of the newly public companies to live up to the inflated expectations. The rise in initial price also makes it hard to make the case for holding the stock, because the buyers know it's going to underperform.

So what's going to be the fallout from Facebook?

There's no doubt that Facebook's troubles have chilled the market. The Securities and Exchange Commission is reviewing the offering. There's talk about forcing Nasdaq to update its systems. Congressmen are starting to push for reform. Three major questions remain.

First, why was the demand misread? To me this shows the need for accurate price discovery. Everyone tells the manager that they are long-term buyers, but the aftermarket shows them to be the opposite.

Second, who is entitled to selective disclosure? For all its completeness, the prospectus still doesn't contain the key information an investor needs to make a rational investment decision, namely a forward 12-month estimate of earnings and revenue. Almost every deal has "whisper" estimates judiciously dispensed by the lead manager's sales force. This selective disclosure is a direct contradiction to the principle of a public offering.

The third is how to address certain conflicts of interest. Republican Rep. Darrell Issa [Chairman of the House Oversight and Government Reform Committee] in a recent letter showed that the underwriters actually lent stock to short-sellers who dominated the first week's trading. That suggests the hedge fund is a more important client to the underwriter than the issuer.

Did you approach Facebook to do an OpenIPO?

We don't do bake-offs against other underwriters. But I thought Facebook would be a good candidate. Like most social-networking companies on the Internet, Facebook is a co-op in that their customers provide their value. I thought the most effective way would be to offer stock to their user base. The only way they could have done it would have been with a world-wide auction. We proposed the idea through back channels, but it was just too late. Both Morgan Stanley and Goldman Sachs had been involved in financings over the past three years and were significant shareholders.

You've been a controversial figure. Your fans see you as an innovator. Your critics call you a Wall Street turncoat. Which is it?

I've been in business 48 years and have had the privilege of being involved in a large number of technology IPOs. The list includes Internet start-ups, and disruptive technological concerns—Apple (ticker: AAPL),
Adobe SystemsADBE 0.8611145282322549%Adobe Systems Inc.U.S.: NasdaqUSD81.99
0.70.8611145282322549%
/Date(1438376400179-0500)/
Volume (Delayed 15m)
:
2713725AFTER HOURSUSD82.207
0.2170.2646664227344798%
Volume (Delayed 15m)
:
179888
P/E Ratio
118.82608695652173Market Cap
40801911586.1466
Dividend Yield
N/ARev. per Employee
343297More quote details and news »ADBEinYour ValueYour ChangeShort position
(ADBE), Netscape, Instinet, Amazon.com (AMZN), Genentech, and, of course, Google (GOOG)—our candidate for how deals will be done in the future.

When I left Hambrecht & Quist to start WR Hambrecht, I didn'tset out to disrupt anything. But by pushing the OpenIPO process and trying to put retail and institutional shareholders on a more even footing, I hit a nerve. When we first announced the open auction and it had its first success—the Ravenswood Winery deal in 1999—I got a call from a person I knew well in one of the big firms. He said, "I just don't understand you. We've known each other for years. We've worked together. Why are you doing this? I thought you were one of us."

How did Wall Street's traditional syndicate system for selling IPOs emerge?

The traditional syndicates were the result of multiple small entrepreneurial partnerships joining together to raise capital for companies and to share risk. Each dealer would receive his little cut from the pie in the way of selling concessions. Bookrunners negotiated discounts with the issuer, incentivizing the members of the syndicate, and ensuring demand by enticing first-day buyers to sign up to own these new entities. Today's big underwriters may bear the same names but they don't resemble the investment banks of old. They have thousands of employees and mounds of capital and need to generate big fees. That's why they barely look at deals under $100 million.

More recently we tried to cooperate with the big firms. To expand the OpenIPO concept we tried to co-manage with them for a spell in 2008. But it became apparent that our so-called allies were working against us. The underwriters would try to keep us out of the process as much as possible. It came down to incentives. The capital-markets desk and the sales force were dead set against OpenIPOs. They viewed preferential allocation and discount pricing as essential tools. The situation became impossible. Since 2008 we've been back to doing it ourselves. Applied Medical—in registration—is our latest deal.

Are there a few lessons in all this?

Google stands in contrast to Facebook. Google went public fairly early in its growth cycle, so investors could participate in the upside. Facebook was huge when it came public. Google chose our modified Dutch auction to avoid the insider game. The private auction opening price was $85, and Hambrecht's retail bid stack [it handled only individual orders] indicated a higher bid of $97. With Google, the issuer, not the underwriter, made the pricing decision. That decision was based on the stack of actual auction bids. Google came public in August 2004, opening on the first day at $100.01. Since then it has steadily increased more than fourfold. On the other hand, Facebook looks like a deal dominated by insiders.

Can we find new ways to use technology to reach buyers through these social networks while providing institutional access?

One scenario would be to form a co-op partnership with an issuer's best customers giving the retail bids for up to 50% of the deal at a preferred price. Samuel Adams founder Jim Koch took his company [
Boston Beersam -1.3200877075222626%Boston Beer Co. Cl AU.S.: NYSEUSD220.52
-2.95-1.3200877075222626%
/Date(1438376525700-0500)/
Volume (Delayed 15m)
:
521468AFTER HOURSUSD217.3689
-3.1511-1.428940685652095%
Volume (Delayed 15m)
:
2625
P/E Ratio
31.19094766619519Market Cap
2937184147.47932
Dividend Yield
N/ARev. per Employee
693332More quote details and news »saminYour ValueYour ChangeShort position
(SAM)] public but gave his customers a chance to participate. He placed little hangers on bottles in six packs announcing the deal in the months beforehand. The response was overwhelming and could easily have comprised the entire issue. Now, more than 15 years later, 30% of the original 30,000 Sam Adams customers still hold the shares, worth $127.12 apiece, versus $15 originally. When customers believe in your product over the long term, they also believe in your shares. That's the kind of shareholder base you want.

Do you think that you can accomplish a conversion to the auction IPO process?

I want to challenge entrepreneurs to revolutionize the new-issue process, urging them to come public early and let the public participate in their growth. So many analysts are now on the buy side if you can distribute the right information to the whole market, analysts will pick it up and make their decision. The old way is like using a slide rule instead of a computer. The Facebook IPO will ultimately force regulators to make all information available to everyone. No more whispering.